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US to support Argentina in court?

July 31, 2013

You may recall that Argentina has been in US court, fighting hedge fund Elliott Capital. Argentina defaulted in 2001, with three quarters of its bondholders “agreeing” to exchange their bonds for similar bonds with face values roughly 70% lower.* Some of the remaining debt is in Elliott’s hands, and their demand for payment has created difficulties paying the “exchange bondholders” who have, of course, already been punished. Should the US weigh in on the side of the exchange bondholders, or let the law, such as it is, take its course?

I don’t understand the law (understatement), but it’s clear that sovereign defaults don’t have the closure you get with corporate bankruptcy: there’s nothing to keep a bondholder from deciding not to settle, as Elliott has. A sovereign country (Argentina) cannot be forced to obey the laws of another country (the US),so it can simply decide not to honor the debt held by Elliott. But if it moves money through another country, in this case to pay the exchange bondholders, that’s another matter. The question of the moment is whether US law does, or should, give Argentina some leeway to pay the exchange bondholders in NY without having the money claimed by the holdouts.

The Obama administration … may end up siding with Argentina. … The administration must decide whether to back a foreign government against a group of U.S. hedge funds and other investors who bought Argentine debt, some of which was purchased at a steep discount after the country defaulted.

Jay Newman, senior portfolio manager at Elliott … said the country has a history of providing inaccurate economic statistics to the U.S. government and others. … In addition to filing their lawsuit, [they] have launched a global public-relations war. …Recent ads in The Washington Post and other newspapers depict Argentina as thumbing its nose at US laws, providing a haven for narcotics traffickers and forming dangerous alliances with Iran.

Yup, that’s pretty much right. Argentina’s numbers are so bad The Economist stopped reporting them. And Argentina’s call to repatriate off-shore money without penalty looks a lot like an offer to launder drug money. Iran, I can’t say. Is this grounds for a court decision? I have no idea, but look forward to continuing entertainment on this front.

*In finance, we call that a haircut. See Kim Ruhl if you’re not sure what that looks like.

PS: If you’d like a legal take on this, we like Shearman and Sterling’s memos, Don’t Cry for Me.

Update (Aug 8): the US has stepped back, but France may weigh in. It’ll be good fun no matter how it turns out.